Good Morning,

Precious metals traded lower overnight but remained largely range-bound even as the dollar picked up a few more point (to 73.17 on the index) and oil slipped closer to but maintained the $124 per barrel. Action continues to be subdued as fresh directional drivers are sought. To wit, participants are now looking for clues to be gleaned from an imminent speech by the Fed's Mr. Bernanke. The latest dollar-related rumblings have really caught the attention of speculators and now the task is to figure out whether this is a deceased feline bounce or an actual resurrection. Aside from this, the landscape really looks like your typical summer doldrum day, albeit it is still early May...

New York spot gold opened under $880, showing a $3.80 loss per ounce at $878.40 as the so-called battle for the $900 value proposition appears more like a retreat than a valiant fight. Mr. Bernanke stressed in his speech that once conditions normalize, the Fed's liquidity measures are no longer needed and should be pulled from the scene. He also indicated that at the present time, conditions are nowhere near normal but are on the mend. Another day of gold/silver decoupling was possibly in the making, as silver picked up a couple of cents to $17.15 per ounce while gold was heading lower. Platinum retreated $35 to $2070 and palladium lost $9 to $435 per ounce.

While the Fed chairman is still concerned about the fragility of the markets at the current time, the US currency appears to be looking ahead at changing conditions and possible interest rate policy reversals. The dollar closed under 73 on the index but once thus far in the month of May. Barring an October surprise anytime between now and...October, this could turn out to be a bit more than that cat in full rigor mortis mode. Marketwatch's chief economist, Irwin Kellner ,chimes in:

Don't look now, but the beleaguered buck appears to be bouncing back. After reaching a record low of $1.60 to the euro a few weeks ago, the dollar has since regained about 3% of its value against this key currency. It has risen even more against the Japanese yen.

In the great scheme of things, this looks like no big deal. After all, the dollar has been slipping and sliding against the euro and the yen for over seven years. That's when the buck and the euro were at parity. The dollar interrupted this decline by rising a couple of times, most notably in 2001 and 2003, but then turned and fell even lower.

However, there is a good chance that the recent run-up in the dollar could be more than just a head fake. Indeed, this just might be the start of something big. To see why, let us start with the fundamental reason for the dollar's protracted decline -- the humongous trade deficit that the United States has been running with the rest of the world.

That it narrowed by almost 6% in March is only the tip of the iceberg. For when you drill down, the numbers are even more striking.

Imports fell by the most for any month since December 2001. What makes this decline even more significant is the fact that it occurred while oil prices were rising sharply. We paid 3% more for the oil we imported in March than we did in February, but actually brought in 3% fewer barrels of the black stuff. Our performance on the export side is also noteworthy. Over the past year, exports have jumped nearly 10% from their levels at this time in 2007 as U.S. goods have become cheaper to holders of rising currencies.

These numbers suggest that the dollar may have reached a level that is low enough to start equalizing the terms of trade. Aside from this, there is the question of interest rates. Ever since the markets came to believe that the Federal Reserve would pause in its campaign to push rates lower, the dollar has stopped falling. Part of the dollar's earlier decline stemmed from investors switching to the euro and other currencies looking for higher rates of return.

Then there's the open-mouth policy. Some monetary officials on both sides of the Pond have recently voiced concern over the shrinking dollar, while others have said that they think the U.S. economy will soon speed up while the euro zone will slow. The implication of these remarks is that the dollar should rise against the euro, and if the markets don't do this on their own, there just might be some sort of coordinated central bank intervention to push the buck higher that could occur at any time.

This has caused currency traders to hedge their bets. In recent weeks there appears to have been a swing to a net long position on the dollar, from years of a net short posture. Indeed, the entire short dollar-long commodities trade seems to be unwinding. Witness the declines in prices of such key commodities as oil, gold and many foodstuffs as the dollar has firmed. A stronger dollar will help both the U.S. and its trading partners, as long as it doesn't get too strong.

Footnote: Just after the latest open-mouth policy statement, the market is now pricing in a 40% chance of a quarter-point higher Fed funds target rate by November - that is only three Fed meetings down the road. Obviously, whatever subtlety was contained in Mr. Bernanke's speech, it did not escape the attention of traders. Let's see how this plays out in the gold market. The early returns thus far this morning do not bode too well...

Happy Trading.